Big banks threat to national economy

Major Dutch banks have a balance sheet total that is almost five times as large as the Dutch gross domestic product (bbp). This means that our country is very sensitive to financial risks, professor of International Economics Harry Huizinga argues in a study that he carried out with Asli Demiregüc-Kunt of the World Bank.

Huizinga and Demiregüc-Kunt examined data from a large group of banks in eighty countries from 1991 to 2009. The usefulness of banks that are big – relative to the national economy – is in fact questionable: the banks are less profitable than their smaller competitors, partly because of their higher borrowing costs. Moreover, if such banks get into trouble, they run the risk that they are too big to be saved by their national government. For that risk banks pay an additional premium on the money market and capital market.

Because the banks are vital to the national economy, large banks tend to be too big to fail:  governments could not afford the failure of such a bank. The bank management will therefore be tempted to take bigger risks. If it goes wrong, there is always a safety net. “We should take measures to reduce those risks”, Huizinga argues.